Life Science “Big Exits” on the Rise

If you have capital to invest in life science venture deals, now is a great time to do it.

That was a central conclusion from a recent report by Silicon Valley Bank, which pointed to decreased competition for new deals and attractive valuations for later-stage companies as bullish indicators for life science investors.

Moreover, for those who already have investments in the sector, the exit climate has been quite favorable.

In 2011, both the number and total value of “Big Exits” (defined as private, venture-backed exits with upfront purchase prices of at least $50 million for device companies and $75 million for biotechs) reached seven-year highs, according to the bank’s analysis. Overall, biotech and medical device companies brought in $8.8 billion in up-front payments, with nearly $4 billion in potential additional milestone-based payments.

There are also reasons to believe the life science venture industry is in a position to continue an up-cycle, according to the report, authored by SVB Managing Director Jonathan Norris.

For one thing, there are more than a thousand life science companies that have been created since 2000 that are still private and likely need additional equity. This presents a great opportunity for new, deep-pocketed capital to come in at attractive valuations and, as late stage investors, benefit from an increased chance of achieving quicker, high-multiple exits.

Additionally, the looming patent expirations of blockbuster drugs, combined with large cash reserves and declining internal R&D at large pharmas, supports the idea that acquirers will be actively pursuing more purchases.

Yet while the outlook may be sunny, the fundraising climate for life science-focused venture funds in recent years has been anything but. Since 2009, fundraising has averaged only $2.6 billion raised per year for life science VCs. At the same time, venture investments in life science companies have been totaling $6 billion to $8 billion annually for the past six years, creating a large and growing funding gap.

For life science venture firms coming out of such a competitive fundraising period, only the most proven exit makers will close funds. As a result, the pool of investors will be both smaller and more accomplished.

Evidence suggests that is already occurring, according to SVB. An analysis of 170 “Big Exits” since 2005 found that the top 10 life science venture funds were stakeholders in 52% of all the deals.